Who, What, Where and How the Dow?
Anyone who turns on a television or radio or opens a major web portal like Yahoo or AOL knows about the Dow Jones Industrial Average (DJIA). Lately a lot of people probably know more about the Dow than they really want to. Few people, however, know what the Dow Jones average really means.
The DJIA began in July of 1884 when the Dow Jones Publishing Company published its first average of U.S. stocks in what would become The Wall Street Journal. This was followed 12 years later with the publication of the first average of 12 "industrial" stocks. The average on that May date was 40.94 and today only one of those 12 companies, General Electric, survives. The rest failed, were trust-busted out of business, or were absorbed by or merged with others. In October 1916 the Dow Jones 12 became 20 companies.
The Dow reached its high of 381.17 in the 1920's bull market on September 9, 1929 only to crash to earth on October 29 when, over two days it lost 24.5 percent of its value - about 150 points. On July 8, 1932 the Dow closed at 41.22, a loss of 89.15 percent from the index's 1929 high point.
It would take another 40 years until November 14, 1972 for the index, now composed of 30 stocks (that change was made in October 1928,) to close over 1000 but two years later it was back to 577.60. It hit 2000 plus in the first few days of 1987. Since then each 1000 point increment came fairly quickly and the index stood at 3004.46 on April 17, 1991; over 6000 in October 1996, and it finally made it to the fabled 10,000 mark in March 1999.
The Dow stands, at this very minute on January 7 at 10.08 at 8901.91 but it reached its all time high of 14,164.52 on October 9, 2007. It had gained 6,978.26 or 94 percent since the low point of the dotcom bubble burst in October 2002. By the way, what is it about the Dow Jones and October?
The Dow Jones History should be very reassuring to investors who have watched their 401(k)s and stock portfolios bleed out 40 to 60 percent of their value over the last 14 months. The lesson is that the market has taken big hits in the past but only paused and never really stopped its upward momentum.
The two greatest single day losses in points occurred in the fall of this year when, on the September 29 and October 16 the Dow fell 777.68 and 733.08 respectively. However, on a percentage basis the September 29 loss (6.98 percent) ranked 20th, well below the 22.61 percent plunge on October 19 1987 and 12.82 percent drop on October 28, 1929.
On the flip side, the recent increases of 936.42 percent on October 13, 889.35 on October 28, and 552.59 on November 13 were the three largest single day point gains in Dow history and the first two ranked 5th and 6th in percentage gains at 11.08 and 10.8 percent.
It seems like this Bear market will never reach bottom and will never end, however, this is not atypical of Dow's behavior. We have really only been in a serious freefall since September although a lot of stocks, especially financials, had suffered a lot over the preceding year. But, it took two years for the dotcom bubble to quit leaking (October 14, 2000 to October 9, 2002) and the DJIA lost 38 percent of its value in that time. It then took another five years to return to 2000 levels. But return it did and then it just kept going until another bubble, this time housing, burst last year. While the average had, by November 20 of this year, lost 43 percent in 2008, the market today is up 2,000 points from that level. It could be that the worst is over.
The Dow Jones is fascinating to watch up close these days. It wasn't until October 16, 1987 that a single day fall in the index was greater than 100 points. If you haven't done so, turn on MSNBC or CNN or open your browser to one of the real-time stock trackers (Yahoo has a good one) and watch the Dow move hundreds of points in minutes, particularly between 3 and 4 p.m. EST when mutual fund traders must close out the day's transactions. It is not unusual for the number to swing from a triple digit negative to a triple digit positive in ten or 15 minutes during that hour.
But for all the emotions it provokes, virtually nobody understands what the Dow means. After reading this you still may not know, but here goes.
The original Dow was composed largely of mining, agricultural, utilities and manufacturing companies. Today the components are very diversified and include Disney, 3M, American Express, Home Depot, General Motors, McDonalds, Merck, and Proctor & Gamble. There probably isn't a single company in the 30 that isn't a household name. In addition to the Dow Jones Industrial Average which so dominates the news, there are also transportation and a utilities indices.
Which companies to include in the indices is at the sole discretion of the editors of The Wall Street Journal and are not set in stone. The Journal frequently removes and adds components to the index, most recently booting AIG out of the club and replacing it with Kraft. The only criteria are that companies are well established U.S. companies and leaders in their respective industries. Individual components considered for inclusion are scrupulously analyzed before a decision is made.
The original averages were simple totals of the current stock prices of the component companies divided by the number of components. Later, however, the divisor was moderated to smooth out the effects of stock splits, corporate spin-offs and other occurrences. Using this divisor also keeps the averages across the years on a comparable basis. The average is unique as it is price weighted and does not take into account the number of shares outstanding.
If you want to calculate the Dow on your own, a list of all of the Dow companies can be found at www.mdleasing.com (scroll down ½ page to the link to "The Current Dow." Once you add up the current stock prices, divide that total by the divisor. The current divisor is 0.1255527090.
Better yet, turn on CNBC and watch the "crawl."